New Legislation Affecting Inherited IRAs and RMDs

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MrMojoRisin
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New Legislation Affecting Inherited IRAs and RMDs

Post by MrMojoRisin »

I understand that the regulations as they pertain to RMDs on Inherited IRAs are changing.
The requirement used to be that you had to liquidate the IRA within ten years of the date of death for the original IRA holder.
I have read where now the InIRAs will be required to make RMD's every year. I cannot find the what dates this new regulation becomes effective and what time span of when the InIRA was opened if that is to be a factor.

I have an InIRA with Schwab.
My mother passed away in November of 2021 and the money was transferred to me in March of 2022.
When I go into the link provided by Schwab to figure out what my RMD should be, it faults out and tells me only IRAs that require an RMD can use the calculator they linked to.

It displays the message after I answer the first question, "Did the original owner die before 2020? When I answer no, it gives me the above message.

So, am I required to make an RMD on an InIRA that is less than a year old and that the original owner died less than a year ago?

As always, thanks for any pearls tossed before me.
Dottie57
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by Dottie57 »

From Vanguard

“ For an inherited IRA received from a decedent who passed away after December 31, 2019: Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule).”

I do not know of a current rule that forces rmds on iRAs inherited in 2020 or thereafter.
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retired@50
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by retired@50 »

I think the IRS has only proposed a rule change with regard to inherited IRAs after the SECURE Act of 2019.

Here's a news article about it from Forbes.
https://www.forbes.com/sites/kristinmck ... 8338e2c51a

Bottom line: it appears to still be up in the air.

Regards,
This is one person's opinion. Nothing more.
Lionel Hutz
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by Lionel Hutz »

Discussing potential future legislation will be locked by mods. Stick to the current law only.

This Schwab page is a good summary. Non-spousal regs are halfway down the page
https://www.schwab.com/ira/inherited-ir ... wal-rules
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retiredjg
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by retiredjg »

I have not heard that the rules are changing. But even if they do, the rules you have to follow are the rules that were in effect when the person died (when you inherited the IRA). That was apparently in November of 2021.

For most situations, that means you must empty the IRA within 10 years. There are no RMDs. It is up to you to decide when you want the money. All now? All in 10 years? Some now and some later? All this is up to you.
cas
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by cas »

Alan S. has been helping people work through this, e.g. here and here.

(And note that discussion of this is allowed because it is proposed regulations now in the public comment period. The post linked above is followed by this post by a moderator:
oldcomputerguy wrote: Thu Aug 25, 2022 5:16 am For the record, the Secure Act was signed into law. The IRS has published proposed regulations for comment regarding changes to RMDs, and discussion of such published proposed changes to regulations is allowed under forum policy. See: Politics and Religion
Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
The published proposal can be seen here: Required Minimum Distributions: A Proposed Rule by the Internal Revenue Service on 02/24/2022
)
billfromct
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by billfromct »

Just to be clear, “the 10 year rule” is that inherited IRAs can be distributed during 11 calendar years if you take a distribution the year the original IRA owner died, then the person that inherited the IRA has 10 calendar years after that to take out the rest.
Dottie57 wrote: Thu Sep 22, 2022 1:55 pm From Vanguard

“ For an inherited IRA received from a decedent who passed away after December 31, 2019: Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule).”

I do not know of a current rule that forces rmds on iRAs inherited in 2020 or thereafter.
I’m just want to make sure my interpretation of inherited IRAs is correct. I have this information in a document for my kids to explain what they need to do should I pass away. This way they can take the inherited IRA distributions over a longer & legal period (11 calendar years) to minimize the potential of getting bumped up to a higher tax bracket & possibly loosing the ability to contribute to a Roth IRA since a Rollover IRA comes into play.

Is my understanding correct?

If I am correct, I wonder if they will change the name to “the 11 calendar year rule”?

bill
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Lee_WSP
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by Lee_WSP »

The proposed regs want to create a two tiered system where you owe an RMD based off the decedent’s life expectancy if they were of RMD age when they died, and the other doesn’t require any.

There are lots of comments railing against the two tier system, so it may not ultimately survive. We don’t know what will happen.
gavinsiu
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by gavinsiu »

Here's what I am reading from this, keep in mind that I am not a CPA, but just talking about what I know.

Your mom died after 2020, I am assuming that you are name as a beneficary in the IRA account. The secure act splits out the beneficary into different groups. You are a non-spouse beneficiary but not a eligible designated beneficiary because you would have to be less than 10 years younger than your mom. Just to be sure, did the account name you as a beneficiary? Is this a traditional ira or a roth?

Was your mom at RMD age of 72 in 2021? If so RMD would have to be have been taken out for her, but that would be handled by the executor (unless you are executor) before the account is inherited by you. Once the account is inherited by you, you have 10 years after the account holders death to empty out the account, you will be subject to taxes.

One sticking point is if you have to follow a RMD schedule over 10 years or just take everyting out by year 10. I was under the impression that the restriction is that you have to empty out the account by the 10th year, but I see the following article:

https://www.forbes.com/sites/kristinmck ... de42602c51

It does not go into law yet to my knowledge.
DetroitRick
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by DetroitRick »

That Forbes article gives as good of an interpretation of this issue as any.

This is not a discussion of pending legislation, it is simply a discussion of a proposed change in IRS regulation for implementation. Per Forum rules: "Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments." That is what this is. The underlying law (passed of course) is the 2019 Secure Act. IRS published this for comment beginning February 24, 2022.

This whole issue came about because there had been a long-standing belief (since 2019 law passed) that a common type of non-spouse beneficiary (I'm simplifying - read the Forbes article for specifics) would not have to (but could) take interim RMD's prior to end of 10-year period. Which ironically the IRS then confirmed when it published Publication 590-B in February of 2022. Then they immediately turned around and re-interpreted this whole thing to mean interim distributions would be required for those that inherited after the original owners required beginning date (for their RMD's). But this was put up for public comment through June, and to date it is still not settled, or at least not that I can find.

So most advisors are telling clients to sit tight for a bit longer. Here's a decent full layout of this issue from a well-recognized CPA firm, DoerenMayhew.
Link (dated June):
https://doeren.com/proposed-regulations ... surprises/
See the section entitled "Proposed Regulations Regarding the 10-Year Rule". We (wife) are affected ourselves, but since the relevant death in our case was this year, we have the luxury of just waiting until next year. For others it is a more urgent issue. In your case, just keep checking your financial news sources over the next month for final resolution. Many people are waiting.

And here is a relevant excerpt from an email wife received from Schwab this week, telling us to "Schedule an RMD for Your Inherited IRA":

"Please note: The IRS has yet to release final regulations to clarify RMD requirements for certain beneficiaries under the SECURE Act that went into effect as of January 1, 2020. While our Inherited IRA RMD Calculator has taken into account the direction that the IRS has indicated in their proposed regulations, please review any RMD decisions with your tax advisor."

In other words, as of this week, for certain categories of inheritors, this is still up in the air (If original IRA owner passed on after their required beginning date for RMD's, otherwise everybody seems to be sure that the simple 10-year rule applies). Not an expert - don't take my word for it - but that's how I read all this.
Alan S.
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by Alan S. »

MrMojoRisin wrote: Thu Sep 22, 2022 1:46 pm I understand that the regulations as they pertain to RMDs on Inherited IRAs are changing.
The requirement used to be that you had to liquidate the IRA within ten years of the date of death for the original IRA holder.
I have read where now the InIRAs will be required to make RMD's every year. I cannot find the what dates this new regulation becomes effective and what time span of when the InIRA was opened if that is to be a factor.

I have an InIRA with Schwab.
My mother passed away in November of 2021 and the money was transferred to me in March of 2022.
When I go into the link provided by Schwab to figure out what my RMD should be, it faults out and tells me only IRAs that require an RMD can use the calculator they linked to.

It displays the message after I answer the first question, "Did the original owner die before 2020? When I answer no, it gives me the above message.

So, am I required to make an RMD on an InIRA that is less than a year old and that the original owner died less than a year ago?

As always, thanks for any pearls tossed before me.
The links posted by others are informative and generally accurate, subject to IRS finalizing the proposed Regs issued in Feb, 2022.
That said, because these proposed Regs included a number of unexpected and complicating provisions, major retirement advocacy groups have filed letter contesting then need for many of these provisions. Due to this situation, it will take longer for these Regs to be finalized than the IRS expected in February.

That said, if your mother passed prior to the start of her RMDs, your situation is clear. You are subject to the 10 year rule unless you are disabled, and there will be no annual RMDs required. However, even if no annual RMDs are required, you would probably benefit from taking measured distributions to eliminate the bunching of taxable income in year 10. The larger the inherited IRA balance is, the more costly this bunching of income would be.

Note that if your mother passed after starting RMDs, you may not only have to take out annual RMDs in Years 1-9 using your single life expectancy (RMD Table I), but you also were supposed to complete Mom's 2021 RMD if she did not complete it. While that should have been done by 12/31/2021, if it wasn't you should complete it this year, and file Form 5329 for 2021 requesting that the penalty be waived. In this situation, the IRS will automatically waive the penalty if you file the 5329 correctly. Note that completing her 2021 RMD (if any) will be taxable to you in the year distributed and you will get the 1099R to report on your taxes.
Topic Author
MrMojoRisin
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by MrMojoRisin »

I thank everyone that has contributed to this topic.

I had heard it was proposed but from my quick read of the notice it looked like it had been adopted.
Topic Author
MrMojoRisin
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Re: New Legislation Affecting Inherited IRAs and RMDs

Post by MrMojoRisin »

gavinsiu wrote: Thu Sep 22, 2022 5:15 pm Here's what I am reading from this, keep in mind that I am not a CPA, but just talking about what I know.

Your mom died after 2020, I am assuming that you are name as a beneficary in the IRA account. The secure act splits out the beneficary into different groups. You are a non-spouse beneficiary but not a eligible designated beneficiary because you would have to be less than 10 years younger than your mom. Just to be sure, did the account name you as a beneficiary? Is this a traditional ira or a roth?

Was your mom at RMD age of 72 in 2021? If so RMD would have to be have been taken out for her, but that would be handled by the executor (unless you are executor) before the account is inherited by you. Once the account is inherited by you, you have 10 years after the account holders death to empty out the account, you will be subject to taxes.

One sticking point is if you have to follow a RMD schedule over 10 years or just take everyting out by year 10. I was under the impression that the restriction is that you have to empty out the account by the 10th year, but I see the following article:

https://www.forbes.com/sites/kristinmck ... de42602c51

It does not go into law yet to my knowledge.
You have described my situation accurately.
My mother was 87 when she passed and her investment firm had been doing the RMD's for her. She left no spouse.
My brother, myself and her two grandchildren each received a portion of her TIRA. (1/3, 1/3, 1/6,1/6) which was passed on to us the first quarter of 2022.

All of us put the money into our own individual InIRAs. I was told I could leave the money sit until the tenth year following her death or I could take any amount I wanted out during that time, but it creates taxable income when I do.

I had planned on leaving it intact until at least after I turn 65 (2024) and then look at what I wanted to do then.

Apparently I had misunderstood the email sent to me concerning this.
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